The Hedge Fund Class and the French Revolution [View All]

By BEN STEIN - NY Times

LET’S start with the obvious. Hedge funds have created a terribly wealthy new class. Although the data is overwhelming that the mass of hedge funds have not been outperforming the market after fees, money still pours into them. This has often made their proprietors terribly rich. Somehow, by some alchemy of brilliant tax lawyers, these people are paying long-term capital gains rates of 15 percent on their compensation (even though much of their pay is tied to trades with holding periods that last seconds). Doctors and lawyers and writers and actors pay about two times that amount.

Then there are the private equity people. They buy and sell companies, usually with other people’s money. They put up a tiny slice of their own capital and multiply it with investments from pension funds, very wealthy families and foreign government investment authorities, and they buy companies. They shake the companies up, cut spending, cut reserves and then resell them to us patsies in the public markets for huge profits. “Rip, strip and flip,” as they say. I am not saying all of them do, but some do.

The private equity people get an immense interest in the profits, vastly outstripping whatever capital they had on the line. This “carried interest,” as they call it, is then taxed at low capital-gains rates. If the private equity companies play their cards right, they use yet another loophole involving amortization of good will to eliminate any tax at all if and when they go public.

Now, all of the above appears to be legal, in that it conforms to laws made by Congress and regulations adopted by the Internal Revenue Service.

So what? The fact that the law is such and such as of July 2007 does not mean that it has to be that way in July 2008 or even in September 2007. The laws of taxation, like all laws, are political. They are not based on commandments from the Lord God Jehovah carried down on tablets from the mountaintop. They are not ordained by Solomon. They are political, hewn from the give-and-take of lobbyists, expert witnesses, law professors, economists and donors.

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http://www.nytimes.com/2007/07/29/business/yourmoney/29every.html